You’ve decided real estate is the investment avenue for you. But why? Are you looking for cash flow or capital growth? Understanding which return type you’re targeting is crucial before parting with your hard-earned savings.
Rental yield versus capital growth: it’s an age-old argument of cash flow versus capital growth, and a debate that is, frankly, rarely settled.
Proponents of yield are likely risk averse or reliant on passive income, while capital growth supporters aren’t strangers to higher risk investments and the whopping lump sums they may bring.
Let’s break down the two return types to help you discover which will supercharge your wealth.
Buying property for rental yield
The obvious beauty of buying an investment property or commercial asset for rental yield is you’ll have continuous cash flow. These passive earnings will add to your primary income, making it far easier to borrow funds from the bank, and are especially important for those entering retirement, and thus have a reduced propensity to earn money.
The certainty a consistent yield provides is what most would consider financial comfort. Who doesn’t want cash in their hand more regularly?
If you’ve bought primarily with rental income or robust yields in mind, then you’re likely expecting this return to exceed the cost of ownership. The income might outweigh the total of insurance costs, tax payments, repairs and maintenance, and of course finance costs. This is called a positively geared investment.
A good yield might be achieved on well-purchased commercial assets, thanks to a solid tenant in a relevant location. You typically won’t find huge yields from residential properties, which are bought popular investments for capital growth.
Buying property for capital gain
Those looking for superior long-term wealth and don’t need the cash flow to accrue such capital might consider buying an investment property for capital gain.
There is admittedly some more risk involved, because the capital you’ll initially outlay and the costs involved in holding the asset will unlikely be recouped during the holding period. They’ll likely be “reimbursed” when the asset is sold and your capital gain (and hopefully not capital loss) is realised.
But there are of course tax implications to receiving a capital gain, in the form of capital gains tax. Learn more about how capital gains tax impacts commercial property investment here.
Residential properties are known for rising in value in a relatively short period of time (within five years – although this is course not always the case… Perth’s median property price barely budged in the ten years after the state’s mining boom), and as a result might offer their owners significant capital gain upon divestment.
But even commercial property, known for its yields, might provide impressive capital gains if the asset is improved upon or the market significantly improved between the date of purchase and the date of sale.
The caveat: why the yield vs capital growth argument is a hollow one
There’s a caveat to this argument. And if you’ve read our blog posts before, you won’t be surprised to read what it is.
Which is better – rental yield or capital gain? It depends on your financial position and your investment goals.
A retiree, whose income stream has become substantially altered due to reduced time in the workforce, will most likely favour a property investment which promotes strong rental yield. Their appetite for risk will most likely be lower than someone whose income potential is robust.
And a professional businessman or businesswoman, whose career clock has years to run, will be less likely to shy away from the risks and demands of an investment positioned for capital growth.
The good news is that investors can – with a well-managed investment – have both.
Unlisted property trusts, or commercial property syndicates, pool the funds of sophisticated investors to go after big league property in Australia. Yields for commercial property investment are typically far higher than those of residential real estate, usually between 5 per cent and 7 per cent (and sometimes far higher).
But it doesn’t end there.
Our investors are usually pleasantly surprised when we divest one of our assets, because we’ve historically achieved a solid capital gain on each asset. In 2022, we sold our $78.8-million industrial portfolio, generating over 38 per cent capital uplift in four years. The overall investor return (including total yield) was 60.36 per cent. Read more about it in our case study.
While there’s of course zero guarantee that every commercial property investment will produce both strong yield and robust capital gain – because every investment is different and carries risk – the possibility that both can be achieved is what has made commercial real estate investment one of the most popular investment avenues for both retirees and high net worth individuals.
Want to boost your wealth? Get in touch with us today to learn more about our exclusive commercial property syndicates. Our next opportunity is just around the corner.
Properties & Pathways is a dynamic Australian property investment company. Our completed syndicates have provided investors an average annualised return of 21.97%. For more information on how you can invest alongside us, get in touch today.